It’s a pivotal moment for small and medium-sized (SME) mortgage lenders in the UK when it comes to climate action.
Our recent report highlighted that the majority of larger lenders have already put climate plans and targets in place – driven in large part by heightening laws on climate disclosure requirements.
The climate leaders amongst these large lenders are also already taking significant steps towards reducing the financed emissions from their mortgage portfolio.
This isn’t true for SME mortgage lenders.
The current state of climate action by SME mortgage lenders
Most SME mortgage lenders are in the very early stages of climate transition planning, or haven’t started at all yet.
In fact, of the 42 SME lenders analysed for our 2024 climate progress report, three-quarters have no publicly available climate plan or reporting and a further 20% report on climate only as a small part of their annual report.
Only 1 SME lender has a climate transition plan, which is (unsurprisingly!) Ecology Building Society with their interim (to 2030) net zero transition plan, published in 2022. A further two SME lenders have a specific annual sustainability report, including Gatehouse Bank.
Other SME lenders, like Atom bank for instance, do report on climate progress specifically, but do so in the form of a webpage rather than a fully-fleshed report – and, importantly, the focus so far is on reducing operational emissions rather than financed emissions.
This is in stark contrast to larger lenders, where more than half have a dedicated sustainability report or transition plan. Larger lenders aren’t perfect – there are major stumbling blocks such as climate data quality for reporting on financed emissions for the mortgage portfolio – but progress is certainly underway.
It’s clear that, overall, SME mortgage lenders are very much at the start of their climate journey.
Of course, it might be that many of them are working on developing their climate plans, emissions calculations, targets, and action plans behind-the-scenes – so we may see more plans published in the next year.
It’s likely also influenced by the fact that, in the UK, SMEs are not yet legally required to submit climate disclosures as part of their annual reporting requirements. This means that those SME lenders that are already disclosing their climate plans and progress are doing so voluntarily, and should be commended for it.
It is, however, expected that SMEs will have to submit climate disclosures from 2025 onwards – which means that those 74% of SME lenders with no publicly available climate plans should make it a top priority to prepare for mandatory climate reporting ASAP.
Plus, whilst they might be currently exempt reporting regulations, SME mortgage lenders are not exempt from climate risks within the mortgage book – including physical risks like flooding as well as transition risks like heightening legislation – which could damage business even without legal implications being factored into the equation.
Taking proactive steps now can not only mitigate these risks but also provide a competitive edge within the market – so let’s take a look at the key steps to take.
What are the key steps in climate transition planning for an SME mortgage lender?
So, what are the best starting points for SME lenders?
Here’s 5 essential steps for a best practice approach:
- Align climate plans with up-to-date standards
- Ensure clean and complete address data for the mortgage portfolio
- Acquire accurate EPC data
- Segment the portfolio to understand the level of risk and action required across different types of lending
- Identify low cost and high impact ways to decarbonise the mortgage portfolio
1. Align climate plans and reporting with up-to-date standards
From 2024 onwards, the IFRS Standards by the International Sustainability Standards Board (ISSB) are the standards used within UK legislation on corporate climate reporting, building on the previous TCFD guidelines.
Whilst SMEs are not yet mandated to report in the UK, they will be soon, and this will be under IFRS.
So, it’s best to get ahead of the game on the key components involved:
- Calculating financed emissions (see steps 2 and 3)
- Quantifying exposure to climate risk: it’s particularly important to run scenario analysis and quantify transition risk due to its complex nature for lenders who must account for unknowns related to future energy efficiency policy.
Including this information in your annual accounts is a great way to future-proof against IFRS reporting.
2. Ensure clean and complete address data for the mortgage portfolio
An accurate calculation of the financed emissions from the mortgage portfolio is, arguably, the most important place to start when it comes to climate as a lender. This is because it’s impossible to ensure robust and credible targets and actions for reducing those emissions without an accurate baseline to base these on – as well as being vital for IFRS reporting.
The first step is to ensure clean and complete address data for all homes in the mortgage portfolio. Without this it’s impossible to match mortgaged homes with their EPC to understand energy efficiency and emissions.
This seems like a simple task, but it can actually be a major obstacle for many lenders. It’s common for addresses to be logged in slightly different ways across different documentation and systems. This is especially true for apartment buildings, where the same property might be referred to as ‘ground floor flat’ ‘flat 1’‘101a’, and so on. The advent of Unique Property Reference Numbers (UPRNs) has helped, but until 2021 EPCs were not issued with a UPRN so there is no way to verify that EPCs issued before this date actually refer to the correct property.
Checking your address data and ensuring it is up-to-date, accurate, and as clean as possible will help make financed emissions calculations much easier from the word go.
3. Acquire accurate EPC data
Gathering EPC data (including the EER, SAP score, and estimated emissions) for the homes in a mortgage portfolio is vital for financed emissions calculations, but is a complex and time-consuming process. Done manually, it means trawling through the government’s EPC register or EPC open data portal.
Furthermore, even once you have the EPCs in hand there will be many homes that are missing a valid EPC, and there are typically large inaccuracies in EPC ratings due to the flaws in the methodology used.
Therefore, you’ll also need to determine an approach to account for missing EPCs and ensure emissions are reflected as accurately as possible. It’s highly recommended to work with a data and analysis partner like Kamma to outsource this data acquisition step for increased speed, accuracy, and cost effectiveness – bearing in mind this process will need to be re-run at least once a year once reporting requirements kick in.
4. Segment the portfolio to understand the level of risk and action required across different types of lending
When we work with lenders on climate data and analysis, we typically find that there are certain segments of the mortgage portfolio that are much more energy inefficient and, therefore, high carbon, than others.
For example, private rental homes are typically more energy inefficient than owner occupied properties, therefore meaning a lower EPC rating and SAP score. Property characteristics such as age and location are an important factor too – old properties and rural properties tend to be more energy inefficient and have higher carbon emissions.
Understanding how emissions vary across different segments of the portfolio enables you to be much more targeted in your approach to climate targets and plans. For instance, there will be a portion of mortgages in the portfolio that are relatively close to an EPC C standard (likely to become the minimum allowed) wherein supporting customers with retrofit awareness and education could be the best action.
On the other hand, there will likely also be a portion of mortgages that are far away from an EPC C and would require relatively high retrofit costs to achieve this – and this is then identified as the highest risk portion of mortgages in terms of transition risk and reducing financed emissions.
5. Identify low cost and high impact ways to decarbonise the mortgage portfolio
Whilst government policy is an important lever for improving energy efficiency and decarbonising the mortgage portfolio, lenders are also responsible for identifying ways in which they can drive decarbonisation themselves.
Scenario analysis, as mentioned earlier, is crucial for understanding where lenders have influence on decarbonisation and where government policy is needed.
The typical outcome for mortgage portfolios is that there are a significant portion of homes that have a high potential to reach a minimum standard of EPC C (and, therefore, significantly cut their emissions) through lender action on retrofit education campaigns and retrofit financing products that support mortgage customers with the upfront costs of retrofit.
For smaller lenders, and especially building societies that work closely with the local community, there’s a particular opportunity to launch localised retrofit lending products, potentially through a green savings bond. This is a great way to reduce emissions towards climate targets, whilst also building a community-focused case study to support brand recognition and reputation – highlighting how a local lender has helped local people to improve home energy efficiency, increasing comfort and property valuation whilst reducing energy costs in a tough economy.
🚀 Get started with ease, with Kamma’s bespoke package for SMEs
We’ve put together an SME-specific package of data and analytical support to help you kick off climate transition planning with the steps outlined in this section – without using up all of your budget for the year.
Get in touch to find out more